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H&M Expands Into Smaller Chinese Cities Amid Competition

Hennes & Mauritz AB (HMB), Europe’s second-biggest clothing retailer, is expanding into China’s smaller cities to woo more customers as retail competition intensifies.

The company, based in Stockholm, is also looking at having clothes made in Myanmar, Ethiopia and Kenya as rising wages in China, its biggest supply market, put pressure on profit margins, Chief Executive Officer Karl-Johan Persson said today in a telephone interview from Melbourne, where the company is opening its first Australian store.

Global apparel companies Inditex SA (ITX) and H&M are expanding into China’s less developed regions as competition intensifies in the largest cities in the Asian nation. Fast Retailing Co. (9983) and Gap Inc. are also adding stores and introducing new brands to tap rising incomes in China, where a measure of consumer confidence rose to a 10-month high in February.

“The whole country is definitely getting more competitive,” Persson said, acknowledging new rivals and international retailers that are improving and expanding in the country. “We’ve tested second tier-cities and third-tier cities in China and found the concept is working well.”

The retailer will open more stores in China this year than in any other market, with between 80 and 90 new outlets planned. Consumers in the smaller cities beyond Beijing, Shanghai and Guangzhou were receptive to H&M’s concepts, and that “opens up a lot of expansion opportunities,” he said.

The stock fell 0.3 percent to 278.6 kronor as of 11:06 a.m. in Stockholm, widening this year’s losses to 5.9 percent.

Market Opportunity

H&M already has stores in smaller Chinese cities such as Meishan, Daqing, Weifang, Baicheng, and Zhangjiajie, according to the company’s website. It will open a store later this year in Zhuhai, a third-tier city bordering Macau, Trish Varker-Miles, an external spokeswoman for the company at the Trish Nicol Agency in Sydney, said by e-mail.

“It’s a reflection of the strong competition in bigger cities and also a reflection of the opportunity to be had in the smaller cities,” said Matthew Crabbe, head of Asia Pacific research for industry researcher Mintel Group. “More companies are coming in and the pie is getting sliced more thinly.”

The chain hadn’t been affected by a government austerity drive that’s hurt luxury-goods makers such as Prada SpA and LVMH Moet Hennessy Vuitton SA, and sales growth has been strong in 2013 and the start of 2014, Persson said.

Zara, Gap

Global fashion companies have introduced new brands into the larger metropolises such as Shanghai and Beijing over last year, heightening competition in the industry. Zara-owner Inditex will increase its store numbers to more than 500 stores this year from about 450 now.

Gap, the biggest U.S. specialty-clothing retailer, opened its first Old Navy store in China in Shanghai last month. The San Francisco-based clothing maker, which had 81 stores in China in the last fiscal year to February, plans to open about 30 Gap stores and five Old Navy outlets in the current fiscal year, it said in February.

Uniqlo-owner Fast Retailing opened the first Chinese outlets for its GU and Princesse tam.tam brands in Shanghai last September and expects to have 305 stores by August. Abercrombie & Fitch Co. is opening its Shanghai flagship store, while Cotton On Group, an Australian clothing chain, said it is looking for a partner in China to open stores as part of moves to ramp up overseas expansion.

Asos Plc (ASC), the U.K.’s biggest online-only fashion store, said start-up costs in China of about 4 million pounds ($6.6 million) were one of the main reasons for a 22 percent decline in first-half profits announced yesterday.

Weaker Aussie

In Australia, where a 12 percent fall in the local currency over the past year has put pressure on overseas retailers, Persson said the chain would cut its profit margins rather than lose its position at the value end of the market.

“We will not raise prices to cover certain external costs,” he said. “We want to get the customers in Australia the same fantastic deal, that’s the most important things.”

Consumer spending on the websites of overseas fashion stores fell 3 percent in the 12 months to January, Andrew McLennan, an analyst at Commonwealth Bank of Australia in Sydney, wrote in a March 31 note, even as sales by their local rivals rose 36 percent.

H&M doesn’t have a timeframe for opening an online store in Australia and hasn’t committed to a fixed number of physical stores in the country. It’s opening its first outlet under the H&M brand this week and is planning another location in Melbourne for its higher-end COS brand.

Rising salaries in China as well as in Bangladesh -- where H&M agreed to improve work safety inspection standards for garment workers -- were putting pressure on costs, Persson said. The company had been testing whether African countries including Kenya and Ethiopia, as well as Myanmar, were able to act as suppliers to the group.

Cost inflation in China and Bangladesh was “obviously affecting our sourcing,” he said. “Transport costs are up a bit as well.”

To contact the reporters on this story: David Fickling in Sydney at dfickling@bloomberg.net; Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net Thomas Mulier

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